Citigroup and Coca-Cola: Two Global Investors Share Their Experiences in Emerging MarketsPublished: June 22, 2006 in Knowledge@Wharton
Todd S. Thomson, chairman and CEO of global wealth management at Citigroup, and Muhtar Kent, president of Coca-Cola International, clearly head up vastly different operations, but during keynote speeches at Wharton's Global Alumni Forum in Istanbul June 8-9, they shared a sense of opportunities still to be realized in a number of emerging markets in the Middle East, Asia and Latin America. While Thomson emphasized the strong fundamentals of emerging market economies, he also noted the inherent volatility and risk of investing in these regions. Kent, responsible for capitalizing on opportunities in the food and beverage area outside of North America, acknowledged the challenges that come with managing a brand that is both profitable and, in some countries, controversial.
Recent Turbulence a "Small Bump in the Road"
Todd Thomson had originally planned to focus his Forum presentation on the low risk involved in investing in the developing world. But given the sell-off in global stock markets that occurred in the weeks preceding his presentation, Thomson did some quick editing. "Obviously there is risk in these markets," he said. "Yet I am convinced that the recent turbulence is a small bump in the road; it's technical, not fundamental." The events of the last few weeks, he added, signify "a correction, and the only surprise is that the correction took so long. I have been nervous for a year about the lack of risk in these markets, about the exuberance of the equity markets. This is clearly unsustainable."
Noting that Citigroup is today investing throughout the developing world "and building bridges to stay in these countries," Thomson offered facts to put the latest correction in perspective. Emerging market indexes are up 70% since 1994, "and there have been fundamental changes in most of the key markets over the past year." For example, there is single-digit inflation in Brazil, Mexico, China and Turkey, single-digit interest rates except for Brazil and Turkey, and more coordination between central banks around the world. "These banks aren't competing with each other; they are working together to lubricate financial markets and create the kind of environments that create jobs and allow economies to grow."
Thomson also cited the impact of privatization on many of these economies which allows for more efficient operations, free trade agreements, and the development of local capital markets. "Reforms have attracted productive capital going to work building factories and hotels and adding jobs." Indeed, many of the countries "have become magnets for capital. You see overseas Indians moving back to India because that is a place of opportunity. When did you think you would ever see that?"
Risk lies in the unpredictability of the markets. "Recent volatility has been particularly acute in Turkey, because the process of fundamental reform has come a little later [than in some other countries]," Thomson said. "But inflation in 2005 was around 7%, compared to 40% to 50% a while ago, and the fundamentals are there. Capital is coming in looking for investments, and when that happens, you can expect volatility. But local players, instead of running for the hills in countries like Brazil, China and Mexico, see this volatility as opportunity. They are putting capital to work more productively in their local economies. This is not true in Venezuela; local capital is not staying there. It doesn't matter what happens to the price of oil. The fundamentals are not there. Cash is there because of the petrodollars, but that is hot cash, purely reliant on the value of oil. That money will leave as soon as the value goes down."
Citigroup, for its part, is "aggressively continuing to build. We will triple our investment in Brazil this year; in Turkey we will double our branches. In India, we are building branches as quickly as the government will let us. We are looking for acquisitions in China, working with the government in its regulatory reform. We are jumping in with both feet. Wealth creation is real; opportunities for development are real."
Asked about the investment situation in the Middle East, Thomson noted that "what struck me was the amount of money coming back into the Middle East from offshore. The old model was to make money from oil and invest it somewhere else. That has changed. Money is coming back and being invested in places like Dubai, Saudi Arabia, Kuwait, Qatar, Abu Dhabi. These are local examples of building strong economies from the ground up as opposed to living off the benefits of commodities such as oil."
As for some of the fundamentals of the U.S. economy, Thomson noted that "the dollar is not looking too good now. Two years ago, when the dollar first began to weaken, there wasn't any place to put your money that was better. Nine months ago that changed and the euro started to look a little stronger. The U.S.'s twin deficits [trade and the budget] continue to increase, so confidence in the dollar is beginning to crack. I would bet that we will see a continued weaker dollar over the next nine to 12 months. You are going to have to start seeing an adjustment with some of the Asian currencies." As for inflation, "if it's real, I think you will see the Fed aggressively raise rates, but I don't think it's real. I don't think we are seeing any wage inflation yet, although you are seeing the potential for commodity inflation to cause wage inflation."
Asked about the rise in oil prices, Thomson cited two factors: "One is a fundamental change in the demand for oil because of developments in places like Turkey, Brazil, Mexico and China. This global growth is putting enormous pressure on several commodities, including oil. It's a long-term issue; we are not going to see the days of $28 a barrel oil unless there is a massive recession around the world. But $70 a barrel is overpriced. A lot of financial players looking to make money jumped into the commodities markets, so you saw a buildup." Thomson noted the fact that people are starting to change over to natural gas and coal as a reaction to the price changes. With oil, however, "it takes time to drill new oil wells, so there is a lag between the price of oil going up and the payoff in more efficient sources of energy. But I think that [payoff] will occur."
The oil story has an impact on Russia as well, where there are "some fundamental improvements but ones that are juiced by oil," Thomson said. "Real question marks exist about its willingness to reform. I worry that the country has gotten lazy about [instituting economic reforms] because it is addicted to the benefits it is getting from high oil prices. That said, it's a big economy. When and if it reforms, it's an important economy. Citigroup is building retail branches in Russia. We think it is worth the bet to invest there today."
Making Things Go Better with Coke
Muhtar Kent, president of Coca-Cola International, had just returned from China the night before he spoke at the Wharton Forum. While there, "I was told that IPOs command a subscription rate of more than 2000 times what is available. These are numbers the world has never seen. And it's because the people believe in the Chinese government's efforts to promote investment and growth."
Coca-Cola has clearly been a big beneficiary of those efforts on the part of governments worldwide to promote private sector investments, which, Kent says, "act as the engine for economic growth by providing more than one half the employment opportunities and controlling three quarters of the world economy."
Coca-Cola is part of this engine. "Our brand is the most recognized in the world. We have partnerships in 200 countries. ... We know that for every job created in our company, as many as 10 more are created in" customer companies, suppliers, bottlers and distributors. In addition, Coca-Cola is "constantly connecting with people in innovative ways," such as its youth empowerment programs in Turkey and its regional partnerships with the United Nations development program to promote access to safe drinking water in places like Southeast Asia and the former Soviet Union countries. "Throughout our corporate citizenship program, every supplier and partner is measured in terms of how well it is engaged with serving its community," Kent said.
Given Coca-Coal's size and reach -- it employs 55,000 people and had sales in 2005 of $23 billion -- Kent was asked during his presentation how one manages a brand that is known around the world but that, in some countries, has proven to be controversial. "Managing the world's best-known and most valuable trademark has to be challenging, but it is also a fantastic opportunity," he responded. "We have 400 brands around the world. We build brands and where we see opportunities, we buy brands. We recently bought the second largest juice business in Russia, called Multon," which has the popular Dobry brand, among others. "We think we can do a lot more with those brands," Kent said. The company also has established partnerships worldwide. "We have Israeli partners in Israel, Arab partners in Saudi Arabia, and so forth, where we sometimes own equity in their business and sometimes it's a purely franchise relationship. ... It's important to see companies and entrepreneurs as partners for a win-win approach."
At the same time, he agreed that "there are countries where Coke may be controversial, whether in Pakistan or Somalia or the Middle East." During the recent uproar over cartoon caricatures of the prophet Muhammad in a Danish newspaper, "some people attacked our trucks. But no one actually knew that Coke is the second largest investor and second larger employer in the territory of Palestine. We provide 3,000 jobs there....Coke is everywhere. Hundreds and thousands of our trucks leave the warehouses at 8 a.m. every day to touch seven million customers around the globe. ... We have to tell our story in a better way as we move throughout the world."
An audience member asked Kent what the Turkish government and business community can do to take the economy to the next level. Kent, who from 1999 to 2005 was president and CEO of the Istanbul-based Efes Beverage Group, the largest local shareholder of Turkish bottler Coca-Cola Icecek, noted that "our national alcoholic beverage is called raki, a drink with aniseed that stays clear in the bottle until you add water, and then it becomes cloudy. Recently a Wall Street Journal reporter described Turkey as raki -- it's clear in the bottle but when you try to expand it, it gets cloudy. Turkey has its ups and downs, but every up is a little bit higher than the last down."
Can it do better? "Absolutely," Kent says. "The challenge is to create an aura of sustainability, trust and transparency that will make more and more people feel more comfortable investing in Turkey. The level of investment here is not sufficient to take Turkey to the next level. The savings of Turkish businessmen and people is not enough. Turkey needs a bigger infusion of global capital, as there has been in China, Ireland, Spain and Singapore. There is competition for that capital because there is not enough for every country. Turkey has to be a forerunner in the competition for scarce capital. It needs to create more trust, more transparency, more sustainability and less of a cloudy raki look."
Kent was also asked what strategies the company has for capitalizing on opportunities in the food and beverage area, especially when it comes to competing with archrival PepsiCo. He noted that while "in the U.S., Pepsi was a little bit ahead of us in the non-carbonated beverages area, if you look around the world in places like China, India and Latin America, we are far, far ahead of the game in the juices, sports drinks, water and tea categories and in all other non-carbonated beverage categories." He added that he "believes very strongly that there is still a lot of growth left in carbonated beverages, especially in China, India and Turkey. The growth we are generating in those markets is substantial. For sustainability, you need to give consumers what they want ahead of the curve."